KEY POINTS
- EBITDA GUIDANCE BREAKDOWN: EXPE is guiding to 2016 Adjusted EBITDA growth of 35%-45%, which is predominately driven by its OWW+AWAY EBITDA target of $300M (both metrics at the midpoint). Both acquisitions closed in 2H15, but the inorganic tailwind from each effectively extends through 2016 given 2015 purchase accounting headwinds. We estimate EXPE needs about 27% incremental EBITDA growth from OWW+AWAY to hit its $300M target. On the remaining legacy EXPE business, EXPE's organic EBITDA guidance calls for 15% growth.
- “IT’S LARGELY A COST STORY”: Consensus is calling for 2016 EBITDA growth at the low-end of EXPE’s target (37%), suggesting some doubt around EXPE’s ability to hit the mid-point of its target. Management has two big levers it can pull aside from cutting redundant/duplicate costs. The first is curbing OWW’s marketing spend (3x its EBITDA) since growing brand awareness for OWW’s is largely counterproductive. The other is how EXPE chooses to categorize certain expenses since EXPE can shift some expenses out of its non-GAAP figures, in turn inflating its reported Adjusted EBITDA.
- AWAY USER FEE = KICKER: The takeaway from the prior two bullets is that EXPE could possibly hit its inorganic EBITDA target largely on the cost side alone, even without revenue growth. On the other end, AWAY could provide the upside from its model transition (see note below). For context, AWAY could drive the 27% EBITDA growth mentioned above from the new user fee alone if it can capture ~$1B of its estimated $15B in annual bookings online. Timing issues will limit the total 2016 opportunity, but very small progress with the user fee will go a long way toward EXPE's EBITDA target.
EBITDA GUIDANCE BREAKDOWN
EXPE is guiding to 2016 Adjusted EBITDA growth of 35%-45%, which translates to roughly $483M in incremental EBITDA, of which OWW and AWAY are expected to contribute $300M (both metrics at the midpoint). The OWW & AWAY acquisitions closed late in 3Q15 and 4Q15, respectively, but EXPE didn’t recognize any material OWW EBITDA contribution in 2015 because of a 4Q purchasing accounting headwind. That said, the inorganic tailwind from each effectively extends throughout 2016. OWW & EXPE produced $236M in combined TTM EBITDA in 2Q15, which is the most recent comparable period that we can calculate for both companies. Using that figure as a proxy (albeit dated), EXPE needs about 27% incremental EBITDA growth from OWW+AWAY to hit its $300M target. On the remaining legacy business, EXPE's organic EBITDA guidance calls for 15% growth.
"IT'S LARGELY A COST STORY"
The CFO’s comments on EXPE's ability to hit its 2016 EBITDA target on its 1Q16 call. Consensus is currently expecting 2016 EBITDA growth at the low-end of EXPE’s target (37%), suggesting some doubt around EXPE’s ability to hit the mid-point of its target. However, management has two big levers it can pull, aside from cutting redundant/duplicate costs.
The first is OWW’s marketing spend since growing brand awareness for OWW’s properties is no longer a priority, if not counterproductive since OWW’s brands are still competing with EXPE’s legacy brands. For the TTM period ending 2Q15, OWW’s marketing spend was $326M, which was over 3x OWW’s GAAP EBITDA and 35% of its revenue. For illustrative purposes, if EXPE cuts OWW’s entire marketing budget and OWW revenues do not decline by more than 35%, it’s incrementally positive to EBITDA (that also conservatively assumes no variable costs attached to that revenue).
The other lever is how EXPE chooses to categorize certain expenses since we’re all indexing off of Adjusted EBITDA. EXPE can pretty much tag any expense it wants as restructuring and/or reorganization, which would effectively shift the cost out of its non-GAAP expenses, in turn inflating reported EBITDA.
EXPE’s organic EBITDA assumption calls for 15% y/y growth, which would be a concern vs. 1Q16 results (-4% y/y), but we suspect that was due to a combination of seasonality and certain OWW employees migrated into open legacy EXPE positions. Only 10% of EBITDA in any given year is earned in 1Q, so it’s not surprising that we saw pressure from the migrated hires. Naturally, EXPE's leverage off those migrated hires should improves as it moves into seasonally strongest quarters, but we suspect some of those new hires may not be with the company by then.
AWAY USER FEE = KICKER
The main takeaway from the prior two bullets is that EXPE could conceivably hit its inorganic EBITDA target largely on the cost side alone, even without revenue growth. On the other end, AWAY could provide the upside to EXPE's target.
We recently published a note discussing the AWAY model transition (link below), which presents a considerable opportunity since it’s largely based on capturing a take on the estimated $15B in bookings that AWAY’s subs are already earning from the service today. Since the new user fee is an agency transaction, there’s no COGS attached to it, which it should mostly fall to EBITDA. EXPE expects the user fee to average 6% of its online transaction value. For context, AWAY could hit its $300M OWW+AWAY EBITDA target if it captures a 1/3 of AWAY’s current bookings volume online.
Granted, we won't see the full ramp in AWAY's online bookings this year since the search algorithm will not favor online bookable listings until early July. But in a far more achievable scenario, AWAY could fill the $63M delta between EXPE's 2016 OWW+AWAY EBITDA guidance and their combined TTM EBITDA (2Q15) from the user fee alone on roughly $1B in online bookings. In short, very small progress with the user fee this year will go a very long way toward EXPE's 2016 EBITDA target, even under fairly restrictive assumptions (see scenario analysis below).
EXPE | Pay to Play (HomeAway)
06/17/16 09:28 AM EDT
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